This week has seen the publication of quite a raft of economic statistics for the UK and by the time we get Gross Domestic Product figures for the 1st Quarter of 2010 later this morning we will have a good idea of the state of the UK economy. Last night also saw the second of the televised leaders election debates in the UK and having written on the subject of our politicians economics I feel it is a good time to analyse what if anything has changed since then. I am aware also that the economic situation of both Greece (where some government bond yields now exceed 10%) and Portugal, and feel that they are a spectre hovering in the background of our economic debate.
My view on “the elephant in the room”
Here are my views on this from last week. They are still true.
Yesterday Vince Cable the prospective Chancellor for the Liberal Democrats used this evocative phrase to describe the question of the UK fiscal deficit and of course this also has an implied view for the National Debt. However this is an area where all three main political parties have similar flaws in their plans. If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.
Just to put the size of this “black hole” into further perspective none of the three main political parties have specified credible plans to cut spending by more than £10 billion. So there is quite a difference of scale here. Our political class are misrepresenting the facts and are attempting to mislead voters. This will not help you tonight in choosing but please be aware they are all dissembling. What they do after the election will not match the promises they are making now.
I was interested to see Kenneth Clarke give a statement pretty much agreeing with me
“The most urgent question in this campaign is, quite simply, which party is capable of tackling public spending and getting a grip on the deficit.”
Now like Vince Cable, Kenneth Clarke is a generally respected politician. He was Chancellor through an austerity phase in the early 1990s and this was a period that led to an economically successful recovery for the UK. However one should also be aware that it was a policy he was and indeed is keen on (Europe and a single currency) which got us into a mess in the first place.
Comment on the reality
The reality is that Kenneth Clarke has not been able to get his own colleagues in the Conservative party to explain how they would cut public spending and reduce the deficit. The other two main parties are in exactly the same position in that they have no explanation either. I notice that Nick Clegg last night was talking of an economic council combining politicians from all sides as well as the head of the FSA and the Governor of the Bank of England to deal with the deficit. This sounds worthy but of course neatly passes the problem to after the election and so it would appear we will see no real Liberal plan until then. For Labour well they are in government and therefore in fact have and had the most onus on them to publish a credible plan for this reason but they chose not to do this. They appear to feel that what they think is good politics wins over good economics.
You see whoever wins on the 6th May will find that their plans and economic ambitions will be hindered and possibly scuppered by the urgent need to address our fiscal deficit. In that sense all three manifestos are a misrepresentation. There are two big questions which have not been answered by any party.
1. Exactly how will the required (large) squeeze on public spending actually be achieved?
2.Official forecasts for growth in the UK economy are very optimistic, what will happen if these are not achieved in reality?
Our political parties are in effect elbowing each other and fighting for the same piece of turf, none of them have the courage to say this is wrong we should move to new ground. They are frightened of standing out and being accused of peddling misery and bad news.
National Insurance is it a tax on jobs?
No-one seems to be fully explaining this issue and as it is talked about a lot I thought that I would settle this matter. Let us take a look at the Conservative proposal according to their manifesto. You need to be careful as some of the versions on their website describe their plans incorrectly and rather bizarrely as I shall explain below miss out the jobs tax bit! Ooops.
We will make the following changes in April 2011, relative to Labour’s plans:
• raise the primary threshold for employees National Insurance by £24 a week and raise the Upper Earnings Limit by £29 a week; and,
• raise the secondary threshold that employers start paying National Insurance by £21 a week.
So it is quite simple. Their move on employees National Insurance is not a jobs tax as employees National Insurance is a tax paid individually and is analagous to income tax. I doubt whether anyone is calling income tax a jobs tax. However the second part of their change affects employer’s costs as it is paid by them and so it can reasonably be called a jobs tax. This is based on the view that raising one of the costs of employment is likely to lead to less employment. I have not noticed any of the political parties explaining this policy properly which makes me wonder if any of them really understand it.
I notice that there does not appear to be any mention at all of the self-employed…..
The more misrepresentation and sticking their collective heads in the sand I see from our politicians the more I wonder if a hung parliament might actually be a good idea. At least it would create an immediate crisis and we could start on actually acknowledging it and thereby dealing with it.
Although a hung parliament could also show up a flaw in our political system as there are quite plausible routes where Labour could come third in the popular vote and end up with the largest number of seats. This is because “hard-core” Labour seats tend to be smaller constituencies in terms of numbers than “hard-core” Conservative ones. Although perhaps I am getting ahead of myself as only one poll really counts! But I think there is a possible flaw and it could cause even more disaffection with politics if it took place.
In our economic history we have very rarely cut public spending in real terms. We need to cut not only relative to GDP or in real terms we need to cut actual cash amounts too. Apart from post-war periods we last did that in 1931 and 1921/22 according to Lombard Street Economics.
This weeks economic figures
These confirmed trends which we already knew I think.
1. We have an inflation problem which is higher and more persistent than many expected.
2. Our unemployment picture is confused but our trends for employment (falling) and inactivity (rising) are not confused. As this year progresses we will need our private-sector to create jobs as it is plain our public-sector will need to start shedding them.
3. Our national finances are in poor shape and as I have discussed above there is of yet no plan to fix them. The financial year just ended turned out to be a little better than official forecasts but contrary to the official view for the future I have concerns for the next year couple of years as follows.
a. Our economic growth forecasts are very optimistic.
b. Our unemployment forecasts are also rather optimistic going forward particularly as I have highlighted above there needs to be cuts in the public-sector.
c. Tax changes may have shifted revenue into the year just gone and out of the year to come.
d. Under the self-assessment system taxpayers now have the opportunity to update their future tax payments based on last year which overall was a poor one for the economy.
Today’s GDP figures
According to the Office of National Statistics the UK economy grew by 0.2% of GDP in the first quarter of 2010. My first point is that these are only a first estimate and should be treated with caution accordingly (the ONS estimates a possible error of 0.2%, I would be more cautious than that). My second is that they confirm us as being out of recession for now as I have always been uncomfortable with the concept that it takes two quarters to go into recession but only one to come out of it. Breaking the figures down there is a good side which is manufacturing (+0.7%) and a weaker side services which were up by 0.2% which is disappointing.
Put another way the figures mean that we are progressing as if we were back in 2005. Again breaking these numbers down and using 2005 as a benchmark of 100 then our manufacturing output is 89.8 and total services are at 105.2. This is rather revealing I feel.
Update 11:45am Greek Developments
Greek Prime Minister George Papandreou has in a televised address called for the activation of the European aid package. This follows a day of wild rises in Greek government bond yields with her two-year bond’s yield rising to over 11% at one point before closing at over 10%,and a downgrade in her sovereign debt status to A3 by Moody’s ratings agency.
Whilst markets are likely to receive this news initially favourably, as time goes by their minds are likely to become more focused on the issues I raised on the 16th April. These relate to flaws in the euro zone “rescue plan”.
Even if Greece does sign up to the plan further problems with it have come to my mind.
1.Primacy. Who is in charge? Will it be the European Commission? the European Central Bank? the IMF? If you wished to set-up something which was unwieldy and inflexible this is exactly how to do it. The IMF does sometimes co-operate with other institutions but it is used to having primacy and control.
2. Conditions. We still do not have any and we will need some. Usually this would be considered the role of the IMF but we hit point one again.
and at the same time I made some suggestions as to how things might be improved.
My suggestions are as follows
1.Greece should ask for the money offered
2. The IMF should be given primacy and it should set terms and conditions for Greece. Looking at its track record these will involve a further dose of austerity.
3. Greece should begin negotiations on its debt to have a technical default where there is a “haircut”. I have suggested 15% as a value for the reduction as it would put her in the position she was in a year ago. Without a change even moves one and two will not help her solvency problem and the rescue plan will eventually fail.
4. Speed is of the essence. Too much time has already been wasted.
So far only point one of my suggestions has actually been addressed. In the meantime we have seen resistance to the plan from political parties in the largest expected contributor to the European portion of any aid package Germany. They may not stop the plan but they could certainly delay it.
Furthermore the amounts discussed so far seem sufficient to get Greece through 2010 but this to my mind begs the question of 2011 and 2012,what happens then? We have seen the difficulties in getting together an aid package of this size…
Also with Greek ten-year bond yields going above 8% then those going to the German Constitutional Court have a stronger case for arguing that a rate of 5% is in fact a subsidy.
So Greece is clearly not out of the woods yet. However it has been pointed out to me that St George Day is also recognised in Greece and so I would like to wish all English and Greek readers a happy (in the circumstances) St. Georges Day.